The U.S. economy has experienced a tumultuous year. COVID-19 has caused businesses and individuals alike to turn to bankruptcy in order to keep their creditors at bay. Others have delayed filing because they have been able to take advantage of pandemic relief options made available this year. Individuals have been helped by stimulus checks, pandemic unemployment benefits, as well as the ability to defer mortgage and student loan payments, all made available through the CARES Act.

Relief aid has allowed many to delay a bankruptcy filing and projections indicate that this year individual bankruptcies will be the lowest since 1985 (around 560,000) but that number could soar to over a million in 2021 once relief options expire, as cited in the Wall Street Journal with statistics provided by Epiq AACER. Businesses have also been seeking stimulus aid and have received assistance through the Paycheck Protection Program (PPP). However, numerous small businesses have been shut out of these protection programs and have started the restructuring process through bankruptcy or made the hard choice to liquidate and close their doors. Many of these relief programs are set to expire at the end of 2020, so tough decisions will have to be made in 2021.

What Businesses are Suffering the Most?

In assessing the economic impact of the pandemic, some industries were hit harder than others. For organizations that were already struggling prior to the pandemic, this economic downturn has been the final chapter. One of the industries that were in distress prior to the pandemic is the energy sector. Mass shutdowns in early 2020 caused the price of oil per barrel to plummet to unprecedented lows, resulting in many energy companies being unable to pay off debt. So far this year, over 70 energy companies have already filed for Chapter 11 bankruptcy protection. Other industries greatly impacted include retail, restaurant chains, travel, and hospitality. While some businesses in these industries are starting to recover, or have found creative ways to keep driving revenue this year, many have been unsuccessful and will need to explore restructuring options or liquidate as the year comes to an end. This is especially true for those that were already distressed pre-pandemic.

Forecasting 2021 Trends

Based upon the current unemployment figures and the delay in additional stimulus relief, the following four bankruptcy trends are likely to emerge in 2021.

1. An increase in Chapter 7 filings for both individuals and businesses when benefits and enhancements expire at year end. During the pandemic, individual bankruptcy filings have remained low due to stimulus checks, unemployment assistance, student loan deference, moratoriums on evictions, and other temporary financial reliefs. These relief measures are set to expire at the end of 2020. If they are not extended or are substantially reduced, the likelihood of increased Chapter 7 filings for individuals is high.
   
   Additionally, businesses that have stayed in operation due to the PPP will be at greater risk of needing bankruptcy protections. If the loans provided by the PPP expire or are not renewed at the same levels, the results will undoubtedly affect the livelihood of many businesses and spur a wave of commercial bankruptcies. Further, businesses that cannot afford reorganization will need to sell their assets off and liquidate completely.

2. An increase in Chapter 11 commercial filings, which have already seen an increase this year. This prediction applies to both traditional Chapter 11 and Subchapter V classifications, especially after PPP loans expire and some businesses cannot fulfill the conditions needed to obtain loan forgiveness. The recently enacted Small Business Reorganization Act has become a way for struggling small businesses to take advantage of a smaller and efficient type of Chapter 11 bankruptcy. the Subchapter V option. There have already been over 1,000 Subchapter V filings in 2020. Notable features of Sub V includes one-step confirmation without requirements for administrative fees to be paid up-front, ability to spread debt over three to five years and pay off creditors, and automatic appointment of a trustee that helps create a plan to settle outstanding debts while still leaving management to the business owner. There is also a temporary increase in the debt ceiling up to $7.5 million, which expires on March 27 of next year.
    

3. If there is no more aid extended, anticipate a rise in healthcare industry filings. In 2020, the healthcare sector had a slowdown in bankruptcy filings as government stimulus aid has allowed these critical businesses to continue to operate. However, without an infusion of funds next year, many hospitals and other healthcare companies will be forced to assess options which may include bankruptcy. Due to a rise in the cost of care and lower reimbursement rates, the healthcare industry has been distressed for past few years.  Without continued aid from the government, many healthcare facilities will struggle keep their doors open next year.
    

4. Some businesses will deploy creative methods to navigate the pandemic and find ways to avoid filing for bankruptcy. Restaurants and grocery stores have made significant investments into delivery and curbside services to keep revenue flowing. Small retailers have created or increased their online presence and marketing efforts to bring in additional revenue and avoid liquidation. More innovative methods, like virtual dining kits or free sidewalk delivery, will emerge as the pandemic ensues and companies attempt to stay afloat. Unfortunately, some will not have the financial resources or business savvy to successfully execute these changes and will need to explore bankruptcy benefits.
    

What’s Next?

2020 has been unusual for bankruptcy filings, which can be directly attributed to the effects of the pandemic and the federal government’s stimulus response. On one end of the spectrum, bankruptcies slowed for both individuals and some commercial businesses because they received needed government aid. On the other side of the spectrum, commercial bankruptcies increased in certain industries, especially energy, retail and casual dining. As aid runs out and the new year approaches, those holding off on bankruptcy decisions will soon start running out of options.

For 2021 however, individual filings are expected to soar. Entertainment and recreational businesses that cater to large groups will need to figure out creative ways to stay afloat or they will be forced to restructure. Recovery will likely be slow in the energy sector since demand for oil will likely remain flat and supply will continue to outpace demand.  Healthcare companies will need to explore their options as the financial reality sets in without more stimulus relief. More small businesses will begin using Subchapter V protections. All of these considerations should arise in the new year, which will make consulting with legal and financial bankruptcy professionals a crucial component to transitioning into this new economy and our post-COVID environment.

If you found this blog of interest, please check out The Pandemic Strikes Again: Energy Sector Bankruptcies Rise and Pandemic Continues to Force Businesses to Explore Bankruptcy.